JoAnn DeGrande – IR
Howard Schultz – Chairman, President and CEO
Michelle Goss – President, Europe, Middle East and Africa
Troy Alstead – CFO and chief administrative officer
Clifford Burrows – President, Americas
John Culver – President, China and Asia Pacific
Jeff Hansberry – President, Channel Development and Emerging Brands
John Glass – Morgan Stanley
Matthew DiFrisco – Lazard
Jeffrey Bernstein – Barclays
Sara Senator – Sanford Bernstein
Diane Guysler – CLSA
Keith Siegner – Credit Suisse
Jason West – Deutsche Bank
Michael Kelter – Goldman Sachs
David Palmer – UBS
John Ivankoe – JP Morgan
Greg – Citi
Bonnie Herzog – Wells Fargo
Draft version. An edited version will be posted soon.
Good afternoon, my name is Rachel and I’ll be your conference operator. At this time I would like to welcome everyone to Starbuck Coffee Company’s Fourth Quarter and Fiscal Year-End Conference. All lines are on mute to prevent background noise. After speakers’ remarks there will be a question-and-answer session. (Operator Instructions).
Thank you, Ms. DeGrande you may begin the conference.
Thank you, Rachel. Good morning everyone. This is JoAnn DeGrande. Thank you for joining us on our conference call. On the call today will be Howard Schultz, Chairman, President and CEO and he’ll be joined Michelle Goss, President of our Europe Middle East and Africa Business and Troy Alstead, Chief Financial Officer. The three presidents of our other segments Cliff, John and Jeff are also on hand for Kaye.
This conference will look forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors discussions in our filings with the SEC including our last annual report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information.
Please refer to the financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures. The earnings release can be found on our website at starbucks.com. This is being westbound cast and an archive of the webcast will be available on our website. Before I turn the call over to Howard, since this is the year-end call we will extend it beyond 60 minutes as needed. Our biennial investor conference will be held on December 5th in New York.
With that let me turn the call over to you, Howard.
Thank you, JoAnn, and good afternoon to everyone on today’s call. Before we begin, as a lifelong New Yorker I’d like to express my concern for the millions of people impacted by this week’s devastating hurricane. The images we have seen and stories we’ve heard are beyond heartbreaking. All of us at Starbucks are grateful to the thousands of first responders who are courageously and selflessly responding to this disaster and our thoughts go out to those directly affected.
I will now turn to the record fourth quarter and fiscal 2012 financial results Starbucks reported today. 2004 was an extraordinary quarter for Starbucks on almost every level. Record fourth quarter revenue of $3.4 billion, strong fourth quarter EPS of $0.46 which includes charges of $0.02 per chair related to our store portfolio optimization initiatives in Europe, an increase in our total company operating margin to 15.4% and significant relevant innovation across our business segments and around the world.
Starbucks’ solid Q4 performance has ideally positioned us to go into holiday with strong momentum supporting a powerful lineup of holiday offerings and continue our commitment to growing sales and deliver increased profits it our shareholders in 2013 and in the future. Q4 also caps off a record full year in which our sales rose 14% to a record $13.3 billion and our earnings rose 18% to a record $1.79 per share what makes our performance remarkable both in profound economic uncertainty and challenged consumer environments in markets all around the world in which we operator and compete.
Starbucks’ ability in Q4 and 2012 is a reflection of business and brand deep connection to global universe of customers and the correctness of our go-to-market strategies. As we were all reminded at our leadership conference last month in Houston, the key to our success are the 200,000 Starbucks partners around the world who proudly wear the green apron and deliver the Starbucks experience to our customers every day. To each of my partners I want to say that I am humbled by your dedication and commitment and you have my deep personal gratitude and appreciation for all that you do.
In fiscal 2012 Starbucks served nearly 3 billion customers who visited our stores. A statistics that testifies to the reach and breadth of our increasingly global brand and local relatives. And while the 18,000 stores in 61 countries we have today may sound like a large number the fact is that the opportunity of Starbuck’s to grow our business around the world in a deliberate fashion has never been greater or more excited.
Over the past 12 months we added over 1,000 net new stores with two-thirds of those being outside the U.S. and we remodeled over 2,000 stores globally. Our plans call for us to open an additional 1300 net new stores and to remodel roughly 2,000 more in fiscal 2013. We are well on our way to having more than 20,000 Starbucks stores on six continents by 2014. After more than 40 years Starbucks’ worldwide appeal remains undenible. Starbucks is seeing strong and sustained growth in our core retail business in the Americas and China and Asia Pakistan regions where comp store sales growth reached 7% and 10% respectively.
I’d like to personally recognize cliff Burrows, President of our Americas second for their leadership in delivering the tremendous results they did in Q4 particularly noteworthy is that Starbucks’ U.S. business revenue grew 9% and U.S. comps grew 7% in Q4. Reflecting a level of execution and intensity that is nothing short of fantastic given the softer than expected performance we saw in Q3.
We accomplished our U.S. results by taking swift and decisive action to drive increased store traffic and improve operating efficiency at the very first sign of the early summer slowing in traffic that we and many other retailers began to experience and we continue to drive traffic in August by relaunching our popular and successful (inaudible) campaign and participating in a record-breaking living social offer that was taken up by 1.5 million Starbucks customers in believe it or not in less than 24 hours.
These initiatives also enabled us to generate incremental profitable sales, further communicate Starbucks’ powerful value proposition and attract more customers to our U.S. stores for the September rollout of our full beverage lineup than ever before.
As I mentioned, earlier, the strong momentum we saw in Q4 has ideally positioned us as we head into Q1 of 2013 and the holiday season. Our traditional red cuffs and holiday beverages are beginning to appear in stores as a prelude to official kickoff of holiday of U.S. stores on November 13th and I can tell you that we have the strongest and most exciting lineup of handcrafted holiday beverages and limited edition products in stores for our customers than ever before.
Also new this year is Starbucks’ Christmas blend Blonde Roast, a specially selected blend of Latin American and aged Sumatra beans that adds a light note. It’s a perfect complement to our full lineup of many offerings that extends both our Blonde Roast offerings and our best-selling Christmas blend portfolio.
But the big news for Starbucks this hand is the innovation and opportunity we have unleashed with Verismo. The only single serve beverage system that delivers perfectly crafted Starbucks lattes and espresso beverages as well as brewed coffee from a single machine. If you haven’t tried Verismo yet I urge you to. It serves the best espresso coffee beverages anywhere bar none and it’s the first and only several serve made pods made from real milk meeting Starbucks’ exacting standards.
In the eight months since we nouns r announced the Verismo system we’ve successfully launched Verismo in 6400 retail locations including premium seatability retailers like Williams Sonoma in the U.S. where Verismo was showcased on the cover of its holiday clear, Herod’s in the U.K. in Starbucks across America and online chance in 300 countries. We are supporting Verismo with only the third national TV campaign in our 41-year hoard elegantly through the unique Starbucks lens and in a way that (inaudible) system and celebrates the Starbucks brand.
With more than 10,000 Verismo demonstrations and sampling events taking place over the next several weeks we expect virus’ momentum to accelerate through the holiday season and continue into the feature. In addition to launching Verismo our channel development team has continued to innovate in the premium single serve category with other new product introductions across the portfolio including blonde roast and our new successful refreshers platform.
As a result of these and other initiatives our channel development business increased revenues by 50% in fiscal 2012 to $1.3 billion. We have expanded our global channel development presence now to 20 countries and we are targeting tens of thousands of new points of distribution. But I can assure you Jeff Hansberry and his team are just getting started.
This month marks 9 first anniversary of the Starbucks K-cup launch and I’m pleased to report that in fiscal 2012 less than a full year of operation, we shipped nearly 500 million Starbucks K-cups and have garnered a full 15.6% share of the previous single cup market, well above what people expected. VIA also continues to grow sales in fiscal 2012. VIA is now available in 14 countries and 80,000 points of global distribution.
It grew nearly 50% in FY ‘12 and garnered a share in tough category in U.S. grocery chance in Q4. Together our complimentary and carefully executed K-cup VIA and Verismo go-to-market strategies provides Starbucks with the strongest and most complete comprehensive lineup of products in a definitive winning hand in the premium single cup category and there will be more innovations to come.
In 2012, we made significant headway against our ongoing plans to elevate and transform our food platform and bring authentic and delicious food to customers for the acquisition of La Boulange Bakery. The fresh bakers we’re producing with the bakers at La Boulange are. We’ve been testing La Boulange offerings to a fantastic customer response and significant sales lift and now plan to roll out La Boulange products to company 079ed stores in the U.S. beginning in the spring of 2013. Evolution Fresh, another of our emerging brands is also helping to expand our retail store and channel development presence.
Last month we opened an Evolution Fresh store in San Francisco’s Fillmore district, our third Evolution Fresh location and the first one outside of greater Seattle. Our fourth location in Seattle’s university village shopping center later this month. At the same time our channel development segment is continuing to significantly expand the availability of bottle, Evolution Fresh juices through premium grocery chance in Starbucks show.
Evolution Fresh bottled juices are now available at over 1500 grocery locations including whole foods and safeway and approximately 2200 west coast Starbucks stores, where we have seen a 100% lift over the juice product it replaced in our stores and we are on track to continue expanding distribution of Evolution Fresh into more of our major U.S. company operating markets throughout fiscal 2013.
Starbucks is making a big difference in the business in just a short time we have owned the company. Sales of Evolution Fresh bottled juice through all chance in the latest quarter were up 50% over sales in the same period of 2011 prior to our acquisition of the company. Our intention is to create another dynamic national brand with Evolution Fresh. And to meet the anticipated demand for Evolution Fresh products we are adding a state-of-the-art juicerery in the state of California in 2013 that will have four to five times the production and packaging capability of the current Evolution Fresh facility.
As I have noted in the past, Starbucks is embracing the seismic shifts in consumer behavior that are well under way.
Let me now take a moment to share our progress and the investments we are making to continue our leadership in card, loyalty, social, digital and now mobile commerce. All of which will significantly enhance our customers’ experience with Starbucks. Our card and loyalty initiatives are continuing to drive great convenience and value for many customers. This has been a record year with nearly $3 billion loaded on to Starbucks cards. With Starbucks card transactions accounting for over 25% of U.S. store tender.
The my Starbucks rewards loyalty program has already amassed more than 10 million members half of whom are active participants and have opted in to receiving communications from us and as many of you know we recently unveiled a number of enhancements to our loyalty program in the U.S. and Canada including making rewards fully digital, making it easier for customers to earn free rewards and including free food as part of the rewards option.
As a result, we’re already seeing record numbers of membership signups in the first few weeks of our any fiscal year which will really bode well for fiscal and calendar ‘13. The depth and breadth of our digital assets continues to grow with leadership positions and engagement across Twitter, Facebook, instagram Pinterest and many other relevant mediums. All this progress will be more relevant giving the sea change and experience enabled by the ubiquity and personalization of mobile technologies.
Our mobiletainment platform has become the leading number one Mitt Romney for any retailer in North America with now more than 2 million mobile payment transactions occurring every week and more than 100 million mobile payment transactions logged since the launch of Starbucks mobile app in January of last year. We believe the rabid adoption of mobile gives us an opportunity to create a unique and much deeper relationship with our customers directly and in the moment like no other consumer brand or retailer. We have the unprecedented ability to reach new customers, create awareness to new products, drive incremental transactions and explore new revenue streams in music and digital publishing.
Recently we have evaluated dozens of mobiletainment solutions and companies with an eye toward trying find a company with a similar vision and approach to creating a mobile payment platform where the customer experience is paramount and that led us to Jack Dorsey and his team at scare. While parting with square and enabling them in our stores complimentary mobile payment operates to our own apps but also interchange these for U.S. debit and credit card processing. We are looking forward to Starbucks customers being able to use the square wallet app to pay for purchases with their mobile phones in U.S. stores later this month.
While we are proud of what we have accomplished thus far in mobile we continue to push the envelope in the future by adding features and interactive activity in such areas as tipping, mobile ordering and personalization and I can assure you the best is yet to come in terms of the innovation that we’re going to bring to the marketplace that creates separation not only between us and other people in our space, but us and every other consumer and retail business.
Well, I’ve touched on the enormity of the global expansion opportunity for Starbucks that lies ahead I’d like take a few moments to update you on a few of our recent global initiatives. Two weeks I was in India to participate in the extraordinary opening of our flagship store in the bustling (inaudible) circle area of Mumbai. Our circle store without question the most elegant Starbucks store we have created anywhere in the world. It is a stunning two-level experience that celebrates intense sensibility and respect for the beautiful tapestry of the Indian culture while at the same time embracing Starbucks coffee heritage.
Following the opening of that store we opened our second and third store in Mumbai. All three stores are exceeding our loftiest expectations. I cannot be more proud to enter the India group with the Tata group a global corporation which shares many of the same values that Starbucks was founded on over 40 years ago. Starbucks’ in India is tremendous and I’m confident India will involve into one of Starbucks’ five largest markets over time. We also continue to deepen our connection to consumers in China where recently alongside Apple and Nike Starbucks was named one of China’s top 10 foreign brands.
Just last week Starbucks received best employer in China recognition. These acknowledgments are a testament to the dedication of our 15,000 Starbucks partners in China who deliver the Starbucks experience to the millions of customers visiting our 700 stores in mainland China each week.
Now, despite recent economic reports pointing to a slowdown in China, it remains for us one of the largest and fastest growing economies in the world with rapidly increasing spending power of a fast-growing middle class and a market that continues to represent a major significant future retail growth opportunity for us. In Starbucks’ business remains extremely strong in China as evidenced by a 52% year-over-year increase in sales and double-digit comps in China.
We’re building the China market deliberately and in a brand creative way by making significant investments in our people, our systems and our operations and the connection our partners are building with our customers in China gives me great confidence that we can ultimately bring the Starbucks experience to tens of millions of consumers to thousands of stores across the mainland. In that regard I am pleased to report that we are on track to return a near term goal of having 1500 stores in China by 2015 and that China will soon be our largest market outside of the U.S.
Our journey across the China and Asia-Pacific region continues as we look forward to opening our first store in Vietnam in early 2013. I recently tended a 10th year anniversary of Starbucks’ entry into Mexico meeting inspiring partners and taking part in the market’s first lead store. With 350 stores in Mexico, it is Starbucks’ third largest market within the Americas region. Mexico is also our fastest growing market in Latin America together with our JV partner we plan to open 300 new stores. Before I introduce Michelle to share developments happy to say progress we’re making in Europe and the U.K.
I want to you about the most important investment we’ll make all year, an investment in our people. Last month 10,000 Starbucks partners gathered in Houston, Texas for our leadership conference. Just as with our transformational conference we held in New Orleans in 2008, Houston provided an extraordinary and inspiring three-day opportunity for us to connect our leaders to the heart of our company, enhance and refine their coffee expertise, inspire leadership skills and perfect the art of exceeding customer expectations.
The power and impact of the three days we spent together in Houston will reverberate through Starbucks this year and beyond and enable us to take our record-breaking fourth quarter in 2012 performance to a completely new level in the future. It’s now my pleasure to turn the call over to Michelle Goss.
Thank you, Howard and good afternoon, everyone. I’m delighted to be with you on the call today to update you on our EMEA business and the progress over the last year as our three region operating model has taken hold and the EMEA leadership team and I have embarked on our transformation strategy or as we call it our renaissance plan. The region today operates across 36 countries and nearly 1900 stores. Over the last year we’ve opened 111 net new stores including 10 company owned and 101 licensed. We’ve grown our geographic reach motor notably with recently announced partnership in Scandinavia. Open first stores in 2013 in Oslo and Stockholm with this terrific new partner.
As you know, the EMEA region historically operates at significantly lower margins than Americas and China Asia-Pacific regions. There are several regions for that. In our company owned markets of U.K, Germany, France, Switzerland and Austria our portfolio is dominated by high street shopping areas with occupancy cost two to two and a half times that of the average occupancy cost in the U.S. as a percent of sales. This portfolio also is not as broad as in other Starbucks regions where highly productive drive-through, softball footprint stores and captive audience license stores also diversifies the retail footprint.
All of these factors coupled with the fragile state of the European economy and one of the fearest competitive environments in the world make for a robust, exciting challenge. But on a positive note, these issues are largely within our control and we are taking action. In the last year we have focused on driving results against three key strategies which are laying the foundation for long-term profitable growth. First, increasing the Starbucks brand presence, help and relevancy across the region.
Second, unlocking the profitability of the existing base through focusing on top-line growth and on operating costs. And third, positioning the region for growth primarily through licensing opportunities.
I have great confidence that the region will choose meaningful revenue and profit growth over the next five years and we’ll deliver against our goal of mid teens margin over time. Let me recap how we performed on the fourth quarter and later I will add some color to the actions we are taking and the progress we are seeing. In Q4 revenues declined 2% versus the premier ditch by unfavorable currency exchange but offset by 29% growth in revenue from licensed stores. Psalm store sales were down 1% for the quarter, largely continued softness in Germany.
Even the U.K. market delivered a slightly positive same store increase for the quarter and the year that was dampened by consumer confidence and disappointing traffic levels experienced by most Hyde street retailers throughout the London Olympics. Beyond our company owned business our J.D. license has shown strength with the Middle East turkey and Russia stroke strong roads through the quarter and the balance of FY ‘12. The more encouraging news for the quarter and the year is the progress on operating income.
While EMEA has operating loss of 6.35 million negative operating margin of 2.3% pour the quarter it included 11.5 million of charges related to the optimization or store portfolio and 9.2 million of asset impairments for the stores in U.K, Germany and France. Excluding these charges operating margin improved over the same period last year as well as the second and third quarters of this year. We achieved this improvement through the efforts we have made on labor management, G&A, waste and a broad emphasis on cost control across all aspects of the business. The European portfolio optimization work involves a number of actions, each focused on improving profitability and very longening our P&L.
These actions included a thorough review of the U.K. store portfolio which resulted in negotiated lease termination charges as well as transfer of airport stores in the U.K. to one of the existing channel licensing partners SSC. As a result operating margin contracted by basis points. As we mentioned we arrested – realized for underperforming stores in the U.K, Germany and France. These expenses are a part of our normal quarterly review of underperforming stores and are not included in the portfolio op anyization charges. They’re reported in store in our EMEA P&L and equate to a negative 320 basis points of margin impact in Q4.
In the fourth quarter we also transferred ownership of 17 stores in Ireland to an existing licensed partner entertainment enterprises. Ireland has always been a small market for us and it made more sense to leverage a partner with the local knowledge and capability in that country to drive profitability and growth. $4.9 million charge which shows up in the other income line of the consolidated P&L outside of EMEA results. Looking forward, there may be additional charges in the coming quarters, likely to be much lesser expense in the Q4 as we have a handful of leases which we are in the process of negotiating with terminations. We know this is the right course of action to take and will leave us with a healthier, stronger portfolio upon which to build.
As I mentioned, earlier, our blueprint for change the India renaissance plan has incorporated lessons from the successful U.S. transformation of 2008 and 2009 that I had the privilege to be a part of. Lens of unique business and consumer challenges of Europe. We are leading the organization to deliver our goals, relevancy, margin expansion and unlocking the region’s growth potential through a disciplined set of actions a direct in copy expertise, our people driving frequency and loyalty will all be telling our story.
I’ll share briefly with you some of the actions of the past 12 months my first year leading the regional team. Coffee and people is at the core of our business and our brand and a central long-term focus of this plan. Given how critical a role it plays in the lives of European consumers we must deliver the best latte on the high street. In the last year we are retrained all of our barista and introduced (inaudible) and retrained locally to respond to the needs of our consumers including changing the standard of our most popular drink in the U.K. the tall latte to special. Response position, long-term investment to winning in the U.K. market.
Equally, we have placed a significant focus on inspiring our people across the region and on shoring up the strength of the Starbucks mission and culture. I have personally traveled now to more than two-thirds of the countries we operate in conducting round tables and open forums with our customers and our people helping to shape our plans ahead. Driving our espresso focus through innovation, local relevancy and marketing will be the primary emphasis of the year ahead.
We have also applied great focus to enhancing the customer relationship and building loyalty and frequency. The biggest move we made this year was introducing customers’ names on cups including Starbucks style chalk name badges on our partners enabling greater customer connection. We’re also placing a great deal of emphasis on the customer environment. Marrying the latest design Starbucks with a local edge. We renovated nearly 100 stores across the U.K. in time for the Olympics.
We opened a now globally acclaimed store in Amsterdam, two beautiful new stores in Madrid and Barcelona and unbelievable store in Kuwait with many more on the way. We’re also addressing value in relative ways. We launched my card and my Starbucks rewards in most of our company markets and most of our VJ licenses. We are dramatically increasing our presence in social media, connect with our customers through these important channels.
As I close out, I would be remiss not to acknowledge the recent media coverage surrounding our tax practices across India. For 14 years Starbucks has been honored to serve our millions of customers across the region. We have never avoided paying taxes, in fact, add here rigorously to the local rules everywhere we do business and demonstrated our continued willingness to be open and transparent about our operations and their impact on taxable income.
We look forward to continuing to clarify our position about our European tax position in our days and weeks to come and I’m so proud of our partners and how they have responded to customers and worked with one another throughout this period. They allowed us to get close to the needs and the voice of our customers and helped to ensure that this is simply a point in time along the way that won’t factor our momentum nor our progress toward our objectives toward the renaissance plan.
The work our partners are doing throughout the region, the passion they are bringing, the love they have for their customers and the Starbucks brand is at the core of the progress we are making. I have great confidence that, like the U.S. transformation, we are positioning this region for profitable long-term growth. Thank you. Now let my turn the call over to Troy.
Thanks, Michelle and good afternoon, everyone. As you heard from Howard and Michelle, we could not be more pleased with the trajectory of our business and the strong results we continue to deliver. 2012 was a record year for Starbucks producing new highs in revenues, earnings, operating margin and return on capital. The company is stronger financially today than at any time in our history. We have a healthier pipeline of possible growth opportunities in fronts of us now than ever before.
And we’re deeper in terms of count and capability to pursue those opportunities than we’ve ever been. I will review the fourth quarter performance of our three other statements and the consolidated results for both the quarter and the year. Then I’ll update you on our guidance for what we happy to be another stronger year in fiscal 2013. In the Americas the fourth quarter was an impressive demonstration of the capability of that team and of their focus and adaptability.
Revenues grew 9% for the quarter, $2.5 billion, with 7% comparable store sales growth. Especially noteworthy about this result is that it came on top of 10% comp growth last Q4 which was the best quarter we’ve had in more than five years. As we discussed on our last call June and July were soft months in the U.S. Clifford burrow took action to turn the direction of our growth. Outstanding experiences to our customers every day. We reintroduced (inaudible) in August and the annual fall favorite pumpkin spice in September. We provided customers value to the living social offer and we provided customers another reason to visit their Starbucks car with the launch of refreshers. The result was a strong recovery of U.S. comp growth in the quarter to 7% with 5 percentage points of transaction growth.
America’s operating income for the fourth quarter grew to $536 million, nearly 21% of last Q4. Strong sales and a high level of operating efficiency, again, provided increased leverage as we expanded operating margin by an outstanding 210 basis points to 21.4%. Store operating expense as a percentage of related revenues dropped 730 basis points to 74.4%. Our experienced team of store managers adjusted labor schedules for the volatility we saw in the early summer period which led to the right levels at the right time to deliver an outstanding Starbucks experience.
Comp sales and occupies soy as a percent of revenues dropped 90 basis points over last Q4 due in part to increased sales leverage on our largely (inaudible) cup. Now, in the China and Asia-Pacific region significant revenue growth continues to drive high margin returns. Revenues at $198 million were 23% higher than last Q4 boosted by incremental revenues from the new stores that opened in fiscal 2012 along with comparable store sales growth of 10%. The 10% comp growth was broadband as our poor company operated markets, China, Thailand, Singapore and Australia all posted healthy increases. This marked the 11th consecutive quarter of double-digit comp growth in cap. While lower than the past several quarters we’ve been expecting that the extremely high comp growth of recent quarters would moderate over time.
However, even with this expected slight moderation of comp growth our business model in China remains outstanding and our growth acceleration plans are on track. In addition to the strength of comp growth in the region, new store performance remains strong. The cap team opened 132 net new stores in Q2, the most ever in a single quarter for this region. Many of these were in China where we ended the year at 700 total stores. But the absolute number of new stores is not our primary focus in cap.
We remain acutely focused on and encouraged by the performance of those new stores. The stores opened in both fiscal 11.and fiscal ‘12 are delivering first year sales of approximately three times their investment. That’s significantly above our targeted sales growth investment ratio and Steve spoke to the high-quality real estate our teams are securing and the premium store experience we are designing and building. Higher pace of growth needs upfront investment to report it. This includes initial rent as we present the stores for business, hire eight to 10 weeks operational standards and understand the Kay dance of transactions and other growth-related expenses.
These expenses were the largest contributor to the 340 basis point reduction in cap operating reduction in Q4 to (inaudible) .9%. A shift in our store portfolio was another contribute be store to margin decline. As we have discussed in the past we expect that as we continue our profitable and rapid growth in China we will shift the mix of stores in the region from predominantly licensed today to somewhat less licensed in the future. That makeshift will have the impact of moderately reduced cap secretaries over time and the shift did impact margins in the fourth quarter.
In channel development we completed a very active year with a strong fourth quarter. Revenues of $319 million grew by $76 million over last Q4. This increase of 32% was driven largely by sales of Starbucks and (inaudible) K-cups which have gained a full point of market share in chance since June. Channel development achieved a significant mile tone? Q4 as quarterly income exceeded $1 million for the first time ever. Represents an increase of 20% over last year’s fourth quarter. Operating margin of 31.6% declined 160 basis points from last four. A shift in product mix as K-cup grew their share of channel development in the quarter combined with higher commodity costs totaled nearly 500 basis points with margin contraction. Margin pressure with a shift and timing of monthly spend and increased sales leverage.
Now I will review our consolidated results for the quarter. It was clearly the best fourth quarter Starbucks has ever delivered especially given the persistent macroeconomic condition. Grew 11% to a record $3.4 billion. That increase was driven by 6% global comparable store sales growth, 32% channel development growth I just discussed contribution of stores opened over the past 12 months and continued strong performance from our global licensed operations.
Our 6% global comp growth was driven by the strong results in the mechanics and China Asia-Pacific regions. 5% came from transactions with 1% from average ticket. Two-year comp growth of 15% in a quarter represents acceleration for both the second and third quarters.
Consolidated operating income grew 16% to $520 million in the fourth quarter. Operating margin grew 16 basis points driven primarily by increased sales leverage. Commodity cost didn’t have a material impact on the margin in the fourth quarter. Earnings per share of $0.46 grew 24% excluding the nonroutine gains in last Q4. As a remind the nonroutine gains resulted from the acquisition of the remaining in the Switzerland and Austrian markets and the sale of corporate real estate here in Seattle.
The EPS of this Q4 includes the 2-cent impact of two items. The $11.5 million store portfolio optimization in the EMEA P&L and the $4.9 million related to the licensing of Ireland that hit our consolidated P&L. The store closures and ownership changes are a key element toward very longening the EMEA business and represented a step in achieving our longer term goals in that region. For the full fiscal year in 2012 the results were equally strong. Total net revenues grew 14% to a record comp growths and 50% growth in channel development.
The 7% accounts were driven by a 6% increase in transactions as we continued to see new customers in our stores, also serving the same customers more frequently. In fact, we are proud to deliver such meaningful growth without relying on significant price increases. By and large we absorb the spike in coffee costs this year through disciplined cost management and the relentless focus on providing experiences in our stores that encouraged frequent customer visits.
We also set records for both operating income and operating margin at 2.0 billion and 15.0% respectively. The operating margin expansion of 50 basis points over 2011 non-GAAP results was accomplished despite a negative 160 basis point impact or $214 million due to higher commodity costs in fiscal ‘12. Throughout the year our operating teams did an extraordinary job of improving efficiency and tightly managing costs which grew leverage on our strong sales and offset the impact of historically high coffee costs.
The result of the revenue growth and margin expansion was record earnings per share which for the full year reached $1.79. That equates to 18% growth over last year’s non-GAAP EPS of $1.52 per share falling squarely within our guidance of 52% annual EPS growth. We opened 1,063 net new stores across the globe in fiscal 2012. 665 of those were licensed stores which demonstrates the continued strength of the many valuable licensed partnerships we have around the world. In the nearly 400 company owned stores we operated in 2012 are exceeding our first year sales projections indicating another class of stores that will contribute to long-term sustainable growth.
The strength of our business results in significant catch generation allowing us to invest in our existing portfolio stores and existing mull channel global tunes while increasing cash to shareholders. In the fourth quarter we repurchased approximately 12 million shares of stock. Additionally today we announced that 24% increase to quarterly dividend from $0.17 per share to $0.21 per share.
I will now give you an update not initial fiscal 2013 outlook that I provided on last quarter’s call. We continue to target revenue growth in the range of 10 to 13% driven by mid single-digit comp growth of approximately 1300 net new stores and continued strength in channel development. The 1300 net new stores represent an increase over what it provided last quarter driven by further acceleration in China and Asia-Pacific. We’re now cap open new stores in fiscal 2013 with 50% of those being licensed. China will account for slightly one-half of cap new stores. Mering’s 600 new stores and EMEA estimate of 100 net new stores are unchanged.
Capital expenditures are expected to be $1.2 billion in fiscal 2013. This increase reflects the growth in new stores, continuing to focus on renovations is as well as investment in additional manufacturing capacity. Full year consolidated operating margin is now expected to grow by approximately 100 basis points over fiscal 2012. As it continues to drive leverage. I will provide operating statement margin targets at our investor conference in early December.
Given the strength of our global business, the momentum we carry in 2013 and the deep high-flying of growth initiatives we are raising our fiscal ‘13 earnings per share target from 206 to 215. This represents 15 to 20% growth of our fiscal 2012. While we expect each quarter to fall within that 15 to 20% growth range our first quarter EPS is expected to come in at the low end of that range. This is due to investments unique to the first quarter including our leadership conference which was held in early October and cost approximately $30 million and the launch of Verismo.
We are positioning Verismo for significant impact in the years ahead and are approaching this as a major platform launch with significant spend in marketing, sampling and store labor. As a result, we expect that Verismo will produce a net loss of approximately $30 million in the first quarter and a total net loss of $30 million for the full year. The launch of Verismo this quarter is just the beginning. We will build and expand the Verismo platform in order to pursue the multibillion dollar global opportunity.
And finally we continue to expect a net benefit of approximately $100 billion or $0.09 per share in fiscal ‘13 due to favorable commodity cost which is including in our targets. We believe that impact will be spread evenly throughout the year at approximately 2 to $0.03 per quarter.
2012 was a fundamental year for Starbucks by every measure. We strengthened our operational muscle with record productivity in the U.S. and enhanced capabilities around the world. We strengthened our ties to our loyal customers with enhancements that provide significant rewards through our loyalty program.
Strengthened our global portfolio by operating profitable stores, closing unprofitable stores and selling smaller markets to local licensees, product lineup with significant innovation around refreshment, health and wellness, coffee and huge opportunity in food.
Strong financial results reaching records for earnings, and operating return on capital and we increased cash returned to shareholders with prudent share repurchases and a growing dividend. We are excited to leverage these strengths and momentum in 2013 in ways that will greatly (inaudible) our partners and shareholders and confident in our outlook of continued strong global growth in the year ahead.
With that I’d like to turn the call back over to the operator for Q&A. Rachel.
(Operator Instructions). Your first question comes from the line of John Glass from Morgan Stanley. Your line is open.
John Glass – Morgan Stanley
Thanks very much. I wanted to just go back to the U.S. and the same store sales that you reported, what the turning point was. We all assumed you entered the quarter in July maybe comping 5ish percent but ended at 7 so that implies there was a fairly dramatic acceleration so was that a consistent acceleration to the quarter, was there a bigger response say to the treat receipt, and just – and just in general what other elements do you think drove it ‘cause with what you did during the quarter was impressive from a promotional standpoint or execution standpoint but I didn’t think any of those stood out in my mind as being events that would drive comp acceleration to this magnitude so any color around that would be helpful, thanks.
Sure, John, thanks for your question. Let me start just briefly and then I’ll ask cliff Burrows the President of our Americas business to speak more specifically about the actions in the quarter and what impact inform Schmoes things were. Yes, you’re right the July, similar to June and as we discussed at our last earnings call in late July was a soft month for us. Soft still growing traffic, still total comp growth growing but softer than we had been trending earlier in the spring. As we progressed through August and September we saw very, very significant recovery in our same store sales and absolutely exited the quarter in a much healthier place than where we entered the quarter. With that I’ll have cliff speak a little more specifically to some of the action we took.
Thanks, Troy. Thanks, John it really was an intense focus on the operations of our stores and our patterns did an amazing job getting along with our daily work, the customers we had in front of us. The (inaudible) we received was well received by both our partners because they’re familiar with it and our customers because it was an old favorite coming back. Between receipt receipts and living social came to 1% comp growth in the periods when we run it and we also in this period launched our refreshers platform which was in VIA, in handcrafted and in cans in our stores and all of that (inaudible) good pace for the future. So it really was a great focus on the business and really pleased with the way everybody responsibility responded.
John, I’d just add one thing, that the public doesn’t see directly, and that is the use of all of the social media channels that we were able to leverage. Starbucks is at any given month a leading brand on Facebook and Twitter. As a result of that, we were able to leverage a level of engagement with a large number of customers, millions of Starbucks fans and customers, and direct them to the store in ways that really reduced traditional marketing spend. And I think between that, the operations that cliff talked about, the effectiveness of treat reseat living social, and towards the end of the quarter began to have a great result with pumpkin spice latte which got off to a fantastic result despite the fact it’s been year-over-year. All of those things bode very well for the quarter and, as you said, a stunning turnaround from Q3.
John Glass – Morgan Stanley
Your next question comes from the line of Matthew DiFrisco from Lazard. Your line is open.
Matthew DiFrisco – Lazard
Thank you. I just wondered if you could give us a little color on sort of those remodels, I think you touched on a little over 2,000, what you’re seeing as far as volumes afterwards and the key initiatives to those remodels, I guess is it longer term for setting up for better products and more products to sell or is there also sort of a near term added benefit with any sort of improvement on throughput during this high peak time because your traffic number looks extremely strong and I’m curious if that’s a reflection in part due to some throughput initiatives.
Matt, let me start to address it but I’m going to ask Cliff to get into a few more specifics. We have as you said, a long list of major and minor and everything in between remodels over the past year. And as Howard mentioned I think 2,000 remodels planned and we expect to be on a pace – a level like that for some time. I would point out that somewhere in the neighborhood of 2,000 remodels, a smaller number, somewhere in the mid hundreds, are more major significant kinds of things, it might involve a very substantial change or expansion of a store. Or minor change. Very degree of impact on the store itself and the results that come out of it. Needless to say, Cliff will go into more specifics but as we do those major remodels, on that individual store we see a very, very significant increase in comp growth on that store that we reopen.
Store (inaudible) in Soho is a prime example of a significant remodel and as a result of that significant return on investment and enhanced customer experience. I just mention that because it’s in New York.
Matt, it’s Cliff. The 2,000 you mentioned is obviously a global number. Approaching 1700 in the U.S. last year and they do fit in those categories that Troy said. And we are focusing on each refurbishment to make sure we treat it like a new store and equip it to deal with the changing customer base and change demand around peak and at different times of day. We’re looking at it to enhance not only the experience, the seating, the flow, and introducing innovation like clover and each time we innovate we bring in clover and that really helps in many ways, helps us to build the relevance with our customers, build our coffee authority and the intimacy will just keep raising the conversation around coffee and the level of our execution.
And so there isn’t a sort of general number I’d give you as the benefit because each one of them is unique and each one of them we try and do the best thing for our partners in terms of the work environment and our customers in terms of the experience. And there will be a similar number in the coming year in the U.S.
Matthew DiFrisco – Lazard
Thank you. I just had one follow-up also, I guess, you mentioned a little bit about the Evolution Fresh, the 2200 west coast stores, a 100% lift in that. Was that also – I’m not familiar, I haven’t gone to one of those stores – is that similar to how you did the refreshers as far as have you combined that with putting the ready-to-drink product out with also any sort of assortment of handcrafted drinks with Evolution Fresh yet?
If I talk about Evolution Fresh in U.S. Starbucks stores it’s bottled beverages only. We have a range of six of cold press beverages and it ranges from orange juice which is the most familiar and the bestseller and it goes through to whether it’s sweet dreams or essential vegetables it’s a wide range that supports our health along this platform and the increase that Howard refers to is a mixture of both ticket and volume but it has been well received in every single market. Future innovation will come from our learnings from our Evolution Fresh stores of which we open, the latest one, in Fillmore street last weekend down in San Francisco and has had a fantastic reception locally.
Matthew DiFrisco – Lazard
Excellent, thank you very much.
Your next question comes from the line of Jeffrey better Steen from Barclays, your line is open.
Jeffrey Bernstein – Barclays
Thank you very much. I guess a two-part question as we look to cap and I guess specifically to China. One just from a unit perspective, things like this, obviously, an acceleration in openings, I know it’s 300-plus in fiscal ‘13. Considering you only have 700 in total obviously that’s a pretty sizeable uptick. I’m just wondering if you can give some color around real estate availability, whether you’re seeing increased competition, we’ve heard from others perhaps the competitive environment to get these sites is going up and the cost is going up with it.
So I was wondering if you could talk from a real estate perspective and the other piece reels to the other driver would be top line, which would be corn and you mentioned the 10% comp which, I guess, a string of 11 straight quarters of that double-digit. I’m just wondering whether you view like you said the deceleration – how do cypher the deceleration due to the compares versus the deceleration due to what you acknowledge was a macro slowdown in China.
Hi, this is John Culver. The opportunity we have in China is enormous. We continue to see very strong acceptance of the Starbucks brand and when we’re opening our new stores. We’re opening both in our existing cities as well as new cities. We now are in 52 cities across the country. We opened 12 new cities this past year. And as Troy touched on we’re seeing a three times sales-to-investment ratio over the last two years.
So all indications for us is that, you know, China represents right now the most immediate and fastest retail growth opportunity that the company has in front of us. And with that what we’re doing are making significant investments around our people in terms of ramping up the investment and the hiring and training of people to – to staff the new stores as well as investment and infrastructure from a supply chain and I.T. perspective.
We’ve also localized our design resource to help enable speed into the market of opening our new stores. And then also invested heavily in R&D so that we can have locally relevant products that – that match the flavor profiles that our Chinese consumers want.
In terms of the real estate that we’re seeing, we are seeing an abundance of available real estate. And, you know, we’ve invested in local teams and the major provinces and the major cities to go out and to capture that real estate opportunity.
And what we’re seeing is that we’ve been very well received in the new cities that we’re in. We’re going into, consumer response – we’re seeing lines out the door and the new stores in these new cities are exceeding our expectations so we’re very optimistic and very bullish on the opportunity. We’re going to stay very focused and very disciplined in the investments and monitoring the performance of our new stores and our existing stores and we’re going to continue to drive relevant innovation into the stores so that we can continue to sustain the growth. And as Troy pointed out in his comments also, there’s a rebalancing that’s taking place.
That as we continue to accelerate the new store growth, more of our sales growth is going to come from new stores versus comparable sales growth. So you’re going to see a rebalancing of the portfolio. And as part of that, more company owned stores versus licensed stores which is going to have a slight impact on margin over time.
Jeffrey Bernstein – Barclays
But is it – just to follow up, are you seeing any (inaudible) just from the macro perspective versus the compares whether or not you’re seeing consumers shifting to lower priced items or anything concerning just to compare driven slowdown in comp?
I haven’t seen anything that’s concerning to me at this point in time. We monitor this very closely, obviously are aware of, you know, other people’s challenges in China. But for us, you know, we’re continuing to make the investments, we’re taking a long-term view, and we’re pushing forward.
Jeff, I’d also just add to that that we are (inaudible) traffic in China, continuing to grow ticket in China, we’re growing (inaudible). And the two-year comp growth is remaining very, very strong if you compare that over the last several quarters. I think that speaks to the fact that, yes, we’re up against tougher chaser. It wasn’t – compares. It wasn’t that long ago, two years ago, average compares in China reveille a third of U.S. levels.
They’re a grade U.S. levels and catching U, by the way, that comes at a point in time where (inaudible) in the U.S. have been growing and at all time record levels here in the U.S. and yet China’s been growing quickly. We don’t see any concerns about growing volumes whatsoever.
Jeff, just one other thing I’d like to also comments on, you know, in terms of real estate. One of the things that we did earlier this year is host the first ever landlord real estate conference in submit where we brought in – summit. Howard and I and Arthur Rubenfeld had the opportunity to sit Andreas them and talk about the changes we’re going to make in China from a growth perspective and share designs and start to build the unique partnerships we wanted to go after with these key landlords and that’s paying huge dividends for us.
Jeffrey Bernstein – Barclays
Very helpful, thank you.
Your next question comes from the line of Sara Senator from Sanford Bernstein, your line is open.
Sara Senator – Sanford Bernstein
Thank you. I wanted to follow up on the top line on the U.S. Obviously again, very employees impressive. I’m wondering – (inaudible) equally encouraging that you’re sticking to the comp guidance overall. If you could talk a little bit about, A, what your expectations are for the demand environment given I don’t think the overall environment got better just you seemed to reaccelerate. And B, if you could talk a little bit about in terms of the contributions, is it more from new products, is it from Verismo, is it from things more like the treat receipt, is it being more aggressive on social media, that kind of things, just so we have some comfort, you know, in the bottomsup driver of the comps.
This is Howard, I’ll standing, it’s a very interesting multidimensional question. If you look at the last few years, there’s no question that the economic environment in the U.S. has been very challenging, fragile, and depending on the region, very difficult at times. I’m not an economist but I would say that the consumer environment is somewhat bifurcated and has been for a couple of years.
And I’ve (inaudible) described Starbucks literally as a luxury brand but I think we occupy a very unique space that is the premium brand and luxury brand within our space. At the same time, we are still very much an affordable luxury by not only people who are at the high end of luxury consumers but people who can afford Starbucks in all walks of life.
In addition to that, I think we have been able, as evidenced by Q4, and I think this is really important and highly relevant, we’ve been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand while at the same time developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand but reward our customers by, in a sense, putting our feet in their shoes and developing value for them.
Having said all that, I think we are highly confident that despite any turn in the current economy that we can anticipate, that we have the tools, the resources, and most importantly the power in the marketplace to navigate through this by what we’ve been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008. I do think the burden of proof is on companies and consumer brands to recognize there’s a seismic change in consumer behavior as I alluded to in my remarks as a result of social and digital media and the emergence of mobile commerce and mobile payments.
But we are in the most desirable position because of the investments we’ve made over the last few years to not only be the leader in the space but now have the tools and resources and the capability to leverage those channels and mediums in a way that is almost unparalleled in the marketplace. So the short answer is we are optimistic that we – and we’re confident that we can continue to navigate through changes in the economy, and we’ve done it now year-over-year and I think turn in Q4 is not only stunning because there’s great confidence as we head into fall holiday in 2013.
If I can answer, sorry, the other piece is about our people. We have invested greatly in our managers, in our leadership and giving tools to our partners to do their work and I think that has really helped us in terms of the amount of time we have to connect with customers to improve the quality of the customer experience and the relationships we form. And I think there’s nothing better to support that than the fact we have 3 million gold card members as part of my established rewards. And that just gives this dialogue immediate feedback and such richness.
I think just to give a little bit of additional (inaudible) we’ve seen strong growth across the whole of the U.S. in August and September. And if I look back on the year as a whole I’d also say that. And the work we’ve been doing around day parts, whether it’s building capacity at peak or enhancing the food offer around other day parts, we have seen growth on all day parts. So we continue to grow, peak in the morning, but also at lunch, afternoons and now into the evenings.
And I think that is what gives us the confidence about both the opportunity to grow more stores in the U.S. and to continue to grow volumes by expanding our day parts and our ability to deal with peak capacity. Thank you.
Your next question comes from the line of Diane Guysler from CLSA. Your line is open.
Diane Guysler – CLSA
Hello, can you hear me OK?
Diane Guysler – CLSA
I wanted to ask if you’ve seen any changes in the competitive dynamics within the CPG channel given the expiration of the patents on the K-cups, have you seen any movement there from additional excuse?
We’ll have to introduce Jeff Hansberry who is on the call and President of our channel development business and he’ll take that question.
Hi, Diane, thanks for your question. Yes, we have. We have seen the introduction of some private label offerings in the K-cup space that have been previously announced that I think we’re all aware of and we’re starting to see some of those begin to show up on retail shelves. We have not seen a significant impact, though, to retail pricing or the competitive space. And, in fact, we continue to see a strong demand for Starbucks K-cups from our customers.
Your next question comes from the line of Keith Siegner from Credit Suisse. Your line is open.
Keith Siegner – Credit Suisse
Thank you. I wanted to ask the question thinking about all the various things going into this quarter, treat receipt, loyalty programs, product news, promotion news in general, some of which was really unique and kinds of differentiated. As you enter a period of deflation in 2013 and maybe beyond, does this free you up to say do a little bit more of this activity than maybe you used to? Is Q4 somewhat of the new – the new base level. We’ve seen other product in news working very nicely across the sector. Again, does this deflation give you an opportunity to say ramp that effort from maybe what we’ve seen historically? Thanks.
Thank you for the question, this is Howard. I respectfully say no. I think all of us at Starbucks are deeply committed to preserving and enhancing the equity of the Starbucks brand as a result of that, we want to be extremely disciplined and thoughtful about how, when and with who we might do things that create an offer, whether it’s treat receipt that we did on our own or the relationship we took off with living social. I don’t think that you’re going to see Starbucks go on sale or anything like that. I do think that we have to be ultrasensitive to the economic issues and the pressure on the consumer.
But I think we’ve demonstrated over 41 years that the best and neck dote for us is the experience we create in the stores, the quality of coffee and the level of innovation. I think what we haven’t talked about today because it isn’t appropriate is the pipeline of products, categories and innovation that we have in the near and long-term future. Which I think is the strongest pipeline in the history of the company. We’ve taken great steps to recognize that the status quo in our business or any business isn’t going to be good enough but I don’t think we’re going to go down the road of discounting Starbucks or doing things on an ongoing basis. That was highly selective at the time and we’re not going to do that on a consistent basis.
Your next question comes from the line of Jason West from Deutsche Bank. Your line is now open.
Jason West – Deutsche Bank
You touched a little bit on the food program that you’re working to roll out with the upgrades there with the avalanche product line. If you could talk a little bit what you’ve seen in the west coast market where you’ve fested that if you have any details or anecdotes or figures you could share on that and sort of what it looks like from a customer perspective when you make those changes.
Thank you, Jason, it’s Cliff. It is very early days and we have had 10 stores open in San Francisco where we’ve been developing and testing a specific line of pastries and muffins and the like for the morning business, we’re really encouraged by that and that’s really in the very early steps. This week and next week we launch in San Jose and that will be our first time outside of the San Francisco market and that will give us new learnings.
The reaction from our partners in our stores about the quality of the food and the enhanced pride they’ve got to share those products with the customers, the taste is absolutely fantastic and the reaction from customers in the stores we’ve served it so far has been fantastic. I think we’ll be in a much better position after the San Jose launch to give a bit of color, a bit of flavor, and more detail of ruleout plans at the analyst conference in early December in New York. So nothing specific to share, but we’ve seen a great reaction so far.
Your next question comes from the line of Michael Kelter from Goldman Sachs. Your line is open.
Michael Kelter – Goldman Sachs
A few marketing questions, I guess, for Troy. The first is you raised your operating margin guidance for 2013 from 50 to 100 basis points initially to 100 now and I wanted to understand the puts and takes there and why you felt comfortable taking the guidance up before the year even started. And secondly maybe talk about your visibility into 2014 given coffee costs range in the 160 range which as I understand it is well below your locked cost for 2014. Thanks.
Let me speak to the last part first. We have been doing some buying, early buying into fiscal ‘14 on our coffee beans. We’re not very far into 2014 yet but we’re going down that path a little bit and we’ll talk about that in a bit more detail at the conference in December.
Suffice to say, though, as we’ve talked about before, the early read and what we can see is that 2014 is likely to benefit from reduced coffee costs, once again. The order of magnitude is too early to tell. But what I’d point out is that we will exit the year of 2013 with coffee costs significantly lower through our P&L than we entered the year of 2013 coming through our P&L. But, again, that’s a comment given what we see today with not very much of 2014 locked at this point in time.
Now, in terms of margins we raised it today to the 100 basis points of improvement given the number of things that we’ve seen as we’ve come through the fourth quarter, the momentum we have in the top line as well as the completion of the operating plans that we put together annually in the summer, prior to the start of the new fiscal year, and that’s given confidence given both the growth we’ve seen around the world, the investments we know we need to make and new initiatives and growth tunes.
We have in the future and the margin improvement opportunities we have all throughout the P&L, in supply chain, in operations, management, leverage of G&A, and improvement in Europe which we’re expecting based on as you heard from Michelle some of the many changes that her and her team have been tackling over there so I would expect margin improvement really in a number of places in our business and it’s all of that I have visibility to that has given me the confidence and the improvement I talked about both in terms of operating margin as well as earnings growth in the year ahead.
Your next question comes from the line of David Palmer from UBS. Your line is open.
David Palmer – UBS
Hi, congrats on the quarter and the year. I know it’s early days on the Verismo but what is some of the feedback you’re getting from retailers and your own store managers on the machine, the strengths and weaknesses versus other products that are out there in the single serve market?
Jeff, want to start.
Sure. Hi, David, Jeff Hansberry. We are very encouraged on the Verismo system. For us it’s a first in a number of ways. The first system that makes Starbucks quality latte espresso and brewed coffee all from one machine. Got natural milk pods that are made from real milk that deliver a great latte and for the first time ever we’re able to have Starbucks partners our baristas actually go out and meet with customers in specialty retail stores and tell the story of Verismo and tell the story of Starbucks. So we’re off to a very good start. Our shipments are in line with our expectations. But importantly, with a new system like this, we are listening very closely to our customer feedback. And the majority of feedback is very positive. We are listening for customer opportunities for improvement and will continue to do so.
Jeff, you want to just address the attachment on pods that we’re seeing?
Well, it’s still very early. We’ve only got a month’s worth of data, but at purchase we’re seeing significant multiples of purchases of pods. Actually, well ahead of our expectations.
The other thing I would add, and I think this is important, and Troy alluded to this in his remarks, the launch of Verismo is the launch of a product, but behind the scenes, it is the launch of a platform and a deep strategic commitment that we have to the single serve category. Domestically and globally. If you look around the world at what espresso has done building a multibillion dollar business what recurring and green mountain have done and then nascent space that we believe exists in Asia and our brand position, this is a global long-term multibillion dollar business and we are just getting started. Verismo is just the beginning.
Your next question comes from the line of John Ivankoe from JP Morgan. Your line is open.
John Ivankoe – JP Morgan
Thank you very much. A question on Europe specifically, if I may. You know, I mean, there was a little bit of refranchising activity, I guess, in Ireland specifically, you pointed out. And I just wanted to get the sense of how much of an opportunity that made just for your existing company store base whether it’s in Switzerland or France or U.K, Germany what have you to pursue more of an asset-like model in those markets and whether there will be any constraints owning fewer company stores and still maintaining your footprint in any of the major markets you currently are.
Hi, it’s Michelle, thanks for the question. You’ve hit the central part of our strategy going forward which is really a sea change in our opening plans. We see the licensing and franchising opportunity as tremendous. And it does a couple things. First of all, it gives us access to places far beyond the high street which I mentioned in the call earlier is largely where we are penetrated. And we have not only agreed with our existing great partners like SSP, Hostato grill to have a more accelerated plan but bring in new parents, like the U.K. Euro garage which is going to help with us and compliment with us our plans to expand in hundreds of drive-throughs across the region in the next few years.
It’s a tremendous opportunity that’s largely about the new growth and our new growth will be dominated by licensing. We are also are actively looking at the franchising opportunity and we have put that strategy in place in the U.K. and we’re looking to expand that strategy across continental Europe and then as it relates to our existing base we’ll look at smart opportunities that make sense for the business and for our customers.
Your next question comes from the line of Greg (inaudible) from Citi. Your line is now open.
Greg – Citi
Great, thanks. Maybe you could give us a little more color in terms of the coffee consumer as well as the competitive landscape in Europe and maybe any changes that that you’ve seen over the last quarter, too.
Yes, thank you for the question. As I said earlier, we face tremendous competition not only with I’ll call them bigger chains but also with many small operators across the region. As I said I visited many, many markets throughout my first year and what I will tell you consistently across both our customer and our partner feedback is what the customer’s looking for is the Starbucks experience. And that what we bring is unique product, whether it’s our espresso, our Frappuccino, importantly the environment, free wi-fi all of which are assets and we’re also very focused on building like we’ve seen in the U.S. our digital platform, our Starbucks rewards platform et cetera.
So, you know, I would say that there hasn’t been tremendous change per se over the year but we are getting a lot closer to the customer and navigating in ways to bring local relevancy and that relates to, as I mentioned, focusing on espresso, bringing a new level of innovation in that category, and I’ll be speaking to that when we’re together in December. And that’s not only with product but in delivery systems. It’s also around our food and importantly our environment. And we have now built a local design team in Europe based in Amsterdam and some in the U.K. to really bring that local design edge to the customer experience.
Your next question comes from the line of Bonnie Herzog from Wells Fargo. Your line is open.
Bonnie Herzog – Wells Fargo
Bonnie Herzog – Wells Fargo
Hi. Just sticking on Europe I just have a few questions. Could you provide more color on how you expect to improve your food offering in Germany. And then in general what are some of the steps you’re taking to develop a deeper consumer connection throughout Europe, and then how long do you anticipate this will take? And finally, could you talk a little bit more about your action plan to fix some of your supply chain issues in the region?
Sure. Thank you, Bonnie, for the question, I think there’s a few layers to that. First let me address the customer experience. To build on what I said, really emphasizing what Starbucks has done so brilliantly over the last four years is the first task at hand and we have done some things new in the region that we haven’t done anywhere else in the world at this scale which is things like deepening the personal connection, names on cups, names on partners, and I can tell you as I’ve done round tables since we’ve put that in place the customers are really seeing this now as a unique – a unique thing that Starbucks does and they’re getting to know their customers in much deeper ways.
We’re taking advantage of our social media channel, we’re outpacing many of our competitors in the region, we have more than doubled our presence in Facebook and Twitter. We have done new websites across the region both in company owned and in licensed stores. All of which are surrounding and enhancing the customer experience.
As it relates to food, we’ve made nice progress. I will tell you we are just getting started. In the U.K. we relaunched our muffin platform dramatic improvement in quality. We’re seeing that show up in customer response and in our sales. We’re also doing some testing on new distribution models for food.
We’re working through and, you know, we’ve said this throughout the year, we had a major change in our location ticks and we’re working through that we’re very confident that as we look to the year ahead we’re looking at the startup challenges that any retailer would have to that kind of a change something your specific question to Germany study the food opportunity there there’s lots of regional opportunities that we can take advantage of. At the core of Starbucks and the customer of Germany they want the core offerings. They want the muffins and the cakes and we have an opportunity to do a better job there.
Thank you, Michelle. That concludes Starbucks fourth quarter and fiscal year-end 2012 conference call. We thank you all for joining us. We’ll talk to you again in early December at our Analyst Conference. Thank you, and good day.
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